A provision for sales returns is an estimate, booked at period end, of revenue that will be reversed because customers return goods sold on marketplaces. Estimate it from your own return history by channel and category, record it as a refund liability against sales, recognise recoverable stock separately, and true it up against actual marketplace return data every month.
Why ecommerce brands need a returns provision
Marketplaces recognise your sale when an order ships or is delivered, but the customer's return window often runs beyond that date. If an order is sold on 28 March and returned on 6 April, your March books show revenue that no longer exists. Across thousands of orders, that gap can distort quarterly and annual profit.
The accounting principle is simple: do not recognise revenue you expect to reverse. Under Ind AS 115, expected returns are treated as variable consideration, so you record a refund liability and a separate asset for the goods you expect to get back. Companies following Indian GAAP (AS) usually reach a similar result through prudence and AS 9 principles. Which framework applies to you, and how your auditor wants it presented, is a question for your chartered accountant.
What the provision should and should not cover
Be clear about what you are estimating. A typical provision covers:
- Revenue reversal: the selling value of orders in the return window that you expect to come back.
- Inventory recovery: the cost of returned goods you expect to resell, shown separately from the revenue reversal.
- Write-downs: the share of returns that will be damaged, missing or unsellable.
Items that depend on your contract need separate treatment. Whether the marketplace refunds commission, reverse logistics fees or other charges on a return is set by your seller agreement and rate card, not by a general rule. Read those documents and confirm the latest terms before building the assumption into your estimate. GST credit notes and TCS adjustments on returns also follow statutory rules, so confirm the treatment with your tax adviser.
How to estimate the provision
Use your own data, not an industry average. A workable approach:
- Segment sales by marketplace, category and, where returns vary widely, by SKU group (for example, footwear versus accessories).
- Find the return lag. Check how many days after sale returns typically arrive, and what the return window is for each marketplace.
- Calculate historical return rates for completed cohorts, such as all orders from a given month once the window has closed. Separate customer returns from RTO (return to origin) if your reports allow it.
- Apply the rate only to orders still inside the return window at period end.
- Estimate recovery. Work out what share of returned stock is resaleable, and at what cost.
Revisit rates every quarter, and sooner during sale events, when return patterns often shift.
Journal entries for the provision
Exact account names vary by chart of accounts, but the structure is usually as follows.
| Step | Debit | Credit |
|---|---|---|
| Estimated revenue reversal | Sales returns (or Revenue) | Refund liability / Provision for sales returns |
| Expected stock recovery at cost | Returned goods asset (Inventory) | Cost of goods sold |
| Next period: actual return received | Refund liability | Marketplace receivable / Settlement account |
Reverse or adjust the provision in the next period, then book a fresh one for orders still in the window. Your accountant may prefer a different presentation, such as netting sales returns against revenue in the P&L.
Checking the provision against marketplace data
A provision is only as good as the data behind it. Each month, compare your estimate with the marketplace's actual returns report and settlement report. Look for:
- Returns that arrived inside the window versus your assumed lag.
- Return deductions in settlements that do not match any order in your records.
- Returned units that never reached your warehouse or came back damaged, which may support a claim under the marketplace's policy.
- Fee reversals you expected under your agreed terms but did not receive.
Doing this in spreadsheets works at low volumes but gets slow as order counts grow. MarketplaceMetrics by Fundle reconciles marketplace sales and settlements, checks commissions and fees against agreed terms, and tracks returns and recovery cases. Myntra Excel reports are reviewed today, and other marketplaces are in scope discussion.
Common mistakes to avoid
- Booking returns only when cash is deducted. Settlement timing lags the actual return, so profit lands in the wrong period.
- Using one blended rate for every channel and category.
- Ignoring recoverable stock, which overstates the loss, or assuming 100% recovery, which understates it.
- Never trueing up. Differences between estimate and actual should be analysed and the assumption refined.
- Skipping documentation. Keep the rate workings, data extracts and approvals for your auditor.
Worked example
Illustrative example only. All figures and rates below are assumed for explanation and are not benchmarks.
At 31 March, a brand has ₹20,00,000 of marketplace sales (excluding GST) still inside the return window. From its own history, it estimates a return rate of 18% for this category, cost of goods at 55% of selling price, and 90% of returned stock being resaleable.
| Item | Working | Amount (₹, illustrative) |
|---|---|---|
| Expected returns (revenue) | 20,00,000 × 18% | 3,60,000 |
| Cost of expected returned goods | 3,60,000 × 55% | 1,98,000 |
| Resaleable stock recognised | 1,98,000 × 90% | 1,78,200 |
| Damaged stock (stays in COGS) | 1,98,000 − 1,78,200 | 19,800 |
Entries: Debit Sales returns ₹3,60,000, credit Refund liability ₹3,60,000. Debit Returned goods asset ₹1,78,200, credit COGS ₹1,78,200. Net effect on March profit is a reduction of ₹1,81,800.
In April, actual returns from these orders come to ₹3,96,000. The brand under-provided by ₹36,000, books that difference in April, and reviews whether 18% is still the right rate.
Questions and answers
Is a provision for sales returns mandatory for ecommerce brands?
If returns are material, accounting standards expect you to estimate them. Ind AS 115 requires a refund liability for expected returns. Under Indian GAAP the position rests on prudence and AS 9. Check applicability and presentation with your chartered accountant or auditor.
Which return rate should I use for the provision?
Use your own historical return rate from completed order cohorts, split by marketplace and category. Do not rely on generic industry figures. Adjust for sale events, new product launches and any changes in marketplace return policy.
Does the provision affect GST?
The provision is an accounting estimate and does not by itself change GST. GST adjustments follow actual returns and credit notes under the CGST framework. Confirm timing and TCS treatment with your tax adviser and the latest notifications.
How often should I true up the provision?
Monthly is best for brands with high marketplace volumes. Compare the provision with actual returns and settlement data, record the difference, and refine your rate. At minimum, do this at each quarter-end and before year-end audit.